- Mortage protection insurance is designed to cover home loan repayments when the policyholder can't
- It typically covers circumstances of redundancy, illness, injury, and will help dependents if the policyholder dies
- It should not be confused with lenders mortgage insurance (LMI) which protects the lender if a borrower defaults
- Mortgage protection insurance typically comes with limitations
What is mortgage protection insurance?
Mortgage protection insurance is an optional insurance you can take out when you get a home loan. It's designed to cover your mortgage repayments should you become unable to meet them under certain circumstances.
Mortgage protection insurance is a form of consumer credit insurance (CCI) which generally comes with some warnings attached. (More on this below.)
What does mortgage protection insurance cover?
This varies according to the insurer and the specific policy but, generally, mortgage protection insurance covers:
- involuntary job loss (e.g. redundancy)
- inability to work due to illness or serious injury
- death or diagnosis of a terminal illness
However, not all polices cover all of these circumstances and not all illnesses and injuries are covered. You need to ensure you read the fine print of individual policies.
Savings two cents
Mortgage protection insurance may be able to cover home loan repayments, or perhaps your entire loan amount if something happens to you. But it will only cover your home loan.
Other insurance products will do the same thing but cover other expenses as well. You may well be paying for such coverage already via your superannuation fund.
Mortgage protection insurance doesn't have the best reputation and it is entirely optional. It is not the same as lenders mortgage insurance (LMI). Be sure to do your homework.
What is not covered by mortgage protection insurance?
Mortgage protection insurance generally won't cover you if:
- you resign or retire from your job (you need to be made redundant or fired to make a claim)
- you work part-time or as a casual, or less than 20 hours a week (this can depend on the insurance provider)
- you were employed on a contract which expires
- you were sacked because of deliberate misconduct
- you are recorded as having an injury or illness in the 12-month period prior to purchasing the insurance that leads to your disability or death
- your death is caused by consumption of alcohol or unprescribed drugs
As with many insurance policies, there will be considerable fine print to work through.
What's the difference between mortgage protection insurance and lenders mortgage insurance?
Lenders mortgage insurance (LMI) is an insurance policy paid for by you, the borrower, but covers your lender for any losses should you default on your home loan.
You generally have to pay LMI if you have a deposit of less than 20% of the home's value - or a loan-to-value ratio (LVR) greater than 80%.
But mortgage protection insurance is an optional insurance to cover yourself should you be unable to meet future mortgage repayments under specific circumstances.
It's crucial you understand the difference between them.
How much does mortgage protection insurance cost?
Mortgage protection insurance is generally between 0.5 - 1% of your total loan amount annually.
On the average Australian mortgage of around $660,000, this equates to between:
- $3,300 per year at 0.5%
- $6,600 per year at 1%,
or between $275-$550 per month.
The final cost of mortgage protection insurance varies depending on the policyholder's individual circumstances, including:
- home loan amount
- regular repayment amount
- level of cover chosen
- whether the policy is held by one person or jointly
- borrower's age
- health consideration (depending on the insurer)
It will also depend on:
- the insurer
- the specific policy chosen, including inclusions and exclusions
Is mortgage protection insurance worth it?
This will depend on your personal circumstances but if you're considering taking out a policy, it's imperative you keep in mind regulator warnings about such consumer credit insurance (CCI) products.
What did ASIC say about CCI?
After a 2019 review of the CCI industry, financial regulator ASIC found:
- CCI was "extremely poor value for money" with policyholders receiving back 19% of what they'd paid for cover
- CCI sales practices had caused harm to consumers
- some policyholders had been sold policies where they were ineligible to claim
- some lenders used telemarketers to sell policies using "unfair" sales techniques, including failing to inform buyers of policy exclusions
- some policyholders were charged premiums despite already paying off their loans
- many lenders did not offer processes to help customers make an insurance claim
What to consider before taking out mortgage protection insurance?
Since the ASIC review, the regulator has imposed a four-day wait in selling mortgage protection insurance (or any CCI) after a loan is approved.
You have the right to cancel the insurance and get a full refund if the waiting period is not observed.
Here are some additional considerations, as outlined by the federal government's Moneysmart website:
Consumer credit insurance is poor value
CCI payouts could be less than you expect. The payout will be the amount you owe at the time of the insured even which could be less than what you owe when you lodge the claim or it's approved. It also may not cover all the debt you owe.
It may be extra insurance you don't need
You may already be covered if you have other insurance such as life insurance or income protection insurance that covers you for sickness, injury, and death. Depending on the policy, lump sum payout amounts can cover debts, other expenses, and can provide greater flexibility. Some people have this type of insurance via their superannuation fund so it's worth checking if you're already covered.
It's also worth noting mortgage protection insurance will cover your home loan only, not any other expenses.
Have you asked the following questions:
- How much is the total policy cost (not just monthly payments)?
- How much is the benefit? Does it match the size of the debt?
- Will the insurance cost be added to my loan? This can add significantly to the loan cost.
- What exactly can I claim for?
- What are the exclusions?
- Are there limits or caps on the amount, waiting times, or time limits on benefits payable?
As you can likely tell, the government is urging potential policyholders to tread carefully.
Which lenders offer mortgage protection insurance?
Despite the damning ASIC review into CCI products, some lenders continue to offer mortgage protection insurance. However, it has become less common - or less promoted - in recent years.
Be sure to ask questions if you are offered insurance through your home lender. Be clear whether it is separate insurance policy to lenders mortgage insurance (LMI) which you may be required to take out.
Remember: Mortgage protection insurance is entirely optional and should not be sold to you for at least four days after your loan is approved. That gives you time to assess whether you may already be covered through another insurance policy (check your super) or whether other insurance products may better meet your needs.
If you're still looking for lenders offering a competitive home loan, the table below features some of the lowest interest rates on the market:
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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What other options are there?
If you want a safety net but feel mortgage protection insurance isn’t for you, you may want to consider the following options:
Income protection insurance
Income protection covers you in the event you lose your income due to illness or injury, as mortgage protection insurance will. The key difference, however, is income protection pays a monthly benefit of anywhere between 75-85% of your income which can be used as you wish.
This means you can use it to make mortgage repayments as well as cover other bills you may have. You’ll be required to pay a regular premium to be covered and, in the event of your death, the insurer will generally pay out a benefit to your family.
Life insurance
Also known as death cover, life insurance will pay out a lump sum to whoever you have nominated in your policy in the event you die. That party can do whatever they wish with the money, so it could go to covering mortgage repayments or any other debts you may have incurred over your lifetime.
Total and permanent disability (TPD) cover
In the event you suffer an injury or illness that prevents you from working permanently, TPD cover will generally pay out a lump sum. Sometimes included with life insurance, this payout can cover mortgage repayments among other expenses.